Betting on the right horse

Power purchase agreements (PPA) enable the construction of wind and solar power plants without state subsidies. In a study, Axpo analysed the market potential of PPAs up until the year 2030 in twelve European countries and the USA. The result: There is a strong growth potential in the area of PPAs in numerous markets as developers are looking for alternative financing solutions in a world with decreasing governmental support.. There is also a great deal of interest on the consumer side. Green electricity supply by means of guarantees of origin are no longer an adequate solution for many companies. If the price is right, they prefer using PPAs for direct participation in energy system restructuring to achieve more sustainability.

Axpo's origination experts, who are specialised in individual solutions for the marketing and procurement of power from renewable energy sources for their customers, have already determined: PPAs are in demand in many European markets. Fixed feed-in remuneration will be partially or completely eliminated in the medium term for numerous wind and solar power producers.. As a result, the number of signed PPAs in Europe and the USA have peaked in 2018. In Europe, more transactions were concluded last year than in all the previous years.

Axpo active on the producer and consumer side

Axpo is one of the leading marketers of renewable energies in Europe and makes renewable projects possible with PPAs. Axpo's origination experts offer renewable energy power producers tailored solutions – according to their requirements and individual preferences. For example, a fixed volume at a fixed price can be agreed to, giving the producer regular income throughout the year – independent of market price development. The most suitable model is individually tailored according to customer requirements.

On the other side, the demand for PPAs is growing among energy-intensive, major, industrial companies that want to achieve their sustainability goals and ensure long-term, cost-effective, reliable energy supply from renewable sources. This gives supply and purchase agreement providers and brokers an opportunity for additional business in view of the increasing uncertainty of power prices and volumes for both producers and consumers of renewable energies.

Effective strategy

Domenico De Luca, Head of Trading and Sales at Axpo, explains: "For years, our strategy in energy trading has aimed to steadily expand presence and business activities on an international level and to develop the origination business on a broad scale. Particularly in the area of PPAs we saw market potential early on and seem to be meeting the requirements of our customers and business partners with our products and services. We will continue to focus on broad geographical positioning, playing a pioneer role in this growth business and consolidating this mainstay for the company."

Hence, it is no coincidence that experts familiar with local conditions are at work in all of the 39 markets that Axpo serves in Europe and the USA. They can meet the needs of customers with tailored offerings. The good rapport to industrial companies, investors, producers, energy suppliers, SMEs and other market players in the area of renewable energies has definitely paid off: In financial year 2018/19, Axpo was able to conclude PPAs in nearly all the major markets (see box further down).

"Particularly in the area of PPAs we saw market potential early on and seem to be meeting the requirements of our customers and business partners with our products and services."

Domenico De Luca, Head of Trading and Sales

A look into the crystal ball

How will the business develop over the next ten years, which markets will offer the greatest growth potential, what customer groups should PPA providers like Axpo concentrate on and what trends can be expected? To find answers to these and other questions and to examine the PPA market in Europe and the USA, Axpo recently conducted an extensive study that was presented to origination and PPA experts from all the Axpo markets. Results were discussed at length at the regularly held OASIS meeting.

Roman Waespe, Project Manager Corporate Development at Axpo, informed attendees at the event in Zurich about the most important findings and trends up until 2030: "Particularly in the past two years, we have seen a strong increase in PPAs. Compared with the possible market potential in the upcoming years, these volumes are still very low. Depending on market and regulatory developments, there is still significant growth potential."

Roman Waespe, Project Manager Corporate Development at Axpo

Buyer's market: Risk exposure shift

According to Roman Waespe, the first PPAs were bilaterally negotiated long-term contracts with risks being largely passed on from producers to customers. It is expected that in a next step products will become more and more standardised. In addition, it is foreseeable that PPA demand on the producer side will grow more quickly than on the consumer side.

As Roman Waespe sees it, this type of buyer's market will result in PPA contract conditions being increasing influencedby consumer needs. In the short to medium term, PPAs could become a driving force for financing the further expansion of renewable energies. However, in the long term it appears that more and more renewable production will also have to go to the market directly.

Different pace

The PPA market has grown on an international scale in the area of onshore wind and solar over the past years says Roman Waespe. In comparison to the market potential, Scandinavia and Great Britain are well advanced, while market penetration in other countries is still in the early stages.

The study examined regulatory as well as economic framework conditions in the various countries. Roman Waespe explains: "Looking at the factors of regulation and profitability, solar is interesting in the short to medium term particularly in Spain, Italy and Great Britain. Great Britain and Spain also show potential in the area of onshore wind, together with the Scandinavian countries. However the situation in Spain is currently hard to predict, due to the uncertainty about the future regulatory environment, not least due to the most recent auction results in neighbouring Portugal. This shows that future PPA market developments are strongly dependent on regulatory conditions."

Additionally, Germany, the Netherlands and Poland show interesting potential – in Germany mainly with the so-called Ü20 (over 20) plants, that are no longer subsidised under the Renewable Energies Act (EEG).

What about off-shore wind? "This technology is lagging behind in the area of PPAs because power production costs in many regions are higher than those for solar and onshore wind. In addition, there are still attractive subsidy programmes in place for off-shore wind. Before the year 2025, no significant PPA activities are foreseeable around this technology. After that, there ispotential for more off-shore PPAs in Denmark, Sweden, the Netherlands and Germany," reports Roman Waespe.

Increasing demand from companies

Based on study results, increasing PPA demand is expected from consumers in the medium tolong term. This applies in particular to companies with high energy need and that, when possible, aim at covering these needs with renewable energies

Normally producers want long-term, fixed PPA structures. In contrast, consumers often look for shorter-term, more flexible solutions that are adapted to their shorter business cycles," says Roman Waespe. "Axpo is ideally positioned to meet the requirements on both sides thanks to the broad origination and risk management expertise. In the future, there might also be an increase in demand for pan-European solutions in the area of corporate PPAs . With its local presence in all European key markets, Axpo can offer the right solutions."

Solar energy is catching up

Which technology will win the race – solar or wind? The study provided answers, as Roman Waespe reports: "More wind PPAs have been signed so far. This holds especially true in Northern regions . However, solar has been catching up: The most important solar PPA markets are Spain – where there is some uncertainty around possible regulatory developments – and, somewhat surprisingly, Great Britain because prices are relatively high on the British market and the regulatory environment suitable. In addition, we see that the forecast for PPA activities around solar in many regions could improve due to further reduction in investment costs."

For example, it is anticipated that in the USA the major portion of future renewable energy capacities will come from photovoltaics. Efficiency has improved drastically and feasibility has increased as compared to a few years ago. Roman Waespe: "We see similar trends in Europe."

José Ignacio Ortiz Lopez from Axpo Iberia at Oasis-Workshop

Off-shore PPA's in early stages

Does that mean wind energy will fall behind? "No," says Roman Waespe, "whilst the market is concentrated on the Northern European regions today , many Southern regions have attractive potential for wind as well, particularly in the onshore area. In addition, it must be noted that although growth in photovoltaic capacities is expected to be stronger than in onshore wind, because of higher full load hours, onshore wind will be able to keep pace with photovoltaics in Europe from a “TWh perspective”.

The picture is different for off-shore wind: Although first PPA deals have been signed in the Netherlands and Great Britain, overall this technologyis still too expensive and unlikely to show significant growth in the short term without governmental subsidies.

Price is still the decisive factor

So, the question is which customer segments are likely to be interested in corporate PPAs in the future. Roman Waespe explains: "Price hedging and decarbonisation can be expected to remain the key drivers for corporate PPA demand. Lots of companies want and need to become greener. Achieving this on the energy procurement side via guarantees of origin only is not enough anymore to satisfy their sustainability targets. Companies seek more and more the so-called “additionality”, which means a way to directly participate in the investment of a more renewable future. PPAs can offer a solution here. However, nothing will happen unless the price is right."

"Price hedging and de-carbonisation are generally the main drivers for corporate PPA demand."

Roman Waespe, Project manager Corporate Development

Largest markets not automatically in the lead

In terms of absolute numbers, the study identifies the greatest growth potential for corporate PPA demand in the largest markets such as Germany, France, Great Britain and Italy, alone because of their sheer size. However, other, smaller markets can actually be more attractive, for example, when they consist of more attractive corporate PPA customer groups, such as large industrials or data centers. Italy for example is a large market, but with a high proportion of SME businesses which are not (yet) interesting as PPA off-takers. This might change, when aggregated PPA solutions become more common in the markets. In addition, the credit worthiness of a company is an important criterion for acceptance as a PPA customer and here there are enormous differences between the various industries and markets.

Demand for intermediaries between producers and consumers

With its broad geographical coverage and thanks to the continuous exchange of experience and know-how between the experts in the different countries, Axpo is certainly well positioned to play a strong role in this growth field in the future and to meet the needs of power producers and consumers.

Domenico De Luca concludes: "There has to be an intermediary with local know-how that understands both sides in order to bring producers and consumers together. And that's us."

Oasis- Workshop

Good to know

The OASIS workshops take place three times a year. . OASIS is an acronym for Origination And Sales International Summit. The event is held at the different Axpo locations in Europe. Origination, risk management and trading experts from all the Axpo markets share information. Knowledge is exchanged, new products and services are presented, current topics discussed, and external experts are invited as keynote speakers at the meetings. In addition to the workshops, OASIS meetings also have a social networking component. Participants go jogging together and can talk shop in an informal setting.

Northern Europe in the lead

Northern Europe is tops when it comes to PPAs. In Sweden, Axpo concluded long-term power purchase agreements for the wind farms Bröcklingberget, Hornamossen, Nylandsbergen and Högkölen with investors such as Aquila Capital, Asper Investment Management, Green Investment Group and re:cap global investors in the previous financial year. In Finland, Axpo will market the green electricity from the Kröpuln and Storbacken wind farms and in Norway Axpo is supplying the largest industrial company in the metallurgy industry with green electricity for its manganese production. New business in Scandinavia is also significant. Here Axpo provides power producers with market access to trade electricity certificates and certificates of origin from their plants.

Eastern Europe is also booming in the marketing of power from renewable energies: In Poland, for example, Axpo markets the power from the Kisielice wind farm together with the Green Investment Group under a so-called Route-to-Market PPA and also takes over price hedging for a major portion of the related environmental certificates. In Romania, Axpo is cooperating with the Austrian association of electricity companies under a sales partnership to supply the automotive manufacturer Dacia with green electricity from a wind farm on the Black Sea.

Pioneer for solar PPAs

Business is also doing well in Central Europe: The subsidiary in the Netherlands markets green electricity produced by the recycling company AEB Amsterdam and supports the counter-party by providing access to the spot and futures market as well as intraday trading. In Germany, Axpo is one of the first market players ever to conclude a long-term power purchase agreement for non-subsidised solar power with SEAC Holding and the developer MaxSolar.

The teams in the Southern European markets naturally also have a strong presence in the solar business, for example on the Iberian Peninsula: In Portugal a PPA with Exus Management Partners and BlackRock Real Assets was concluded for the photovoltaic facility Solar da Gloria. Last summer the giant solar park Évora, one of the first photovoltaic plants on the Iberian Peninsula, went into operation without any public subsidies – thanks to a ten-year power purchase agreement with Axpo. Things are also running smoothly in Spain. Axpo Iberia supplies green electricity for e-bike charging stations for the Madrid transport authorities.

Urbasolar is building a 5-MWp solar plant near Toulouse

The ABC’s of energy terminology

Axpo Finland was established in 2009 in order to strengthen Axpo's market presence in the eastern parts of the Nordic region. From its office neighboring Helsinki airport, Axpo Finland offers standard and structured products as well as other commodity related products. Axpo Finland is a subsidiary of Axpo Nordic which consists of 40 employees with extensive experience of the energy market. We have offices in Oslo, Malmö and Helsinki. The companies are a part of Axpo Group, a Swiss energy company active in over 30 countries throughout Europe and the USA.